Opinion Former Article

FSB: Banks must not use ICB as a means of raising cost of finance

The banks must not use the reform of the banking sector as an excuse to increase the cost of borrowing once the Independent Commission on Banking (ICB) has laid out its recommendations, says the Federation of Small Businesses (FSB).

It is thought that the ICB, due to report on Monday, will propose that internal ringfences should be put in place to separate the banks’ retail and wholesale divisions and that the banks should increase the amount of capital they hold.

The banking lobby has said that doing this would have a detrimental effect on the amount of money that it can lend and that the cost of finance would increase as a result. They have also said that any reforms now would derail economic recovery.

The banks say that ringfencing will remove the implicit Government guarantee to bail-out a bank that is in trouble and that being required to hold more capital will mean that there is less money to lend.

However, in a new paper, ‘Does bank ringfencing automatically mean an increase in the cost of borrowing?’, the FSB argues that the guarantee would be removed from the investment banking arm and would remain for the retail arm – the section of the bank that lends to people and small businesses.

And, increasing the capital requirements over the medium term and putting a ringfence in place would be beneficial to the structural resilience of the UK banking sector.

If the ICB suggests that capital requirements are raised to more than 10 per cent for example, the FSB recommends reforms be announced as soon as possible but that the banks be given the course of this Parliament to reach those standards. Funding for this increase can be made up from ear-marked profits and reductions in short term incentivised pay.

Our research shows that one in four (19%) respondents said that they’d seen an increase in the cost of finance in the preceding two months. Of those, 49 per cent said that the cost increased between two to three per cent. The FSB does not want to see the banks use the ICB’s report as yet another method of increasing the cost of finance to cash-strapped small firms.

John Walker, National Chairman, Federation of Small Businesses, said:

“The banking sector cannot be too big to fail as the taxpayer cannot afford another bank bail-out. The Government has a golden opportunity to reform the banking sector and it must stand by the promises that it has made.

“The recommendations that the ICB make must be looked at closely and the Government must act on them as soon as possible and ensure they are completed before the end of the next General Election. The Government must use this once in a lifetime opportunity to make the banking sector safer, more competitive and less burdensome on the taxpayer.”


ENDS

Notes to Editors:

The FSB is the UK's leading business organisation with more than 200,000 members. It exists to protect and promote the interests of the self-employed, and all those who run their own business. More information is available at www.fsb.org.uk

Read the FSB briefing ‘Does bank ringfencing automatically mean an increase in the cost of borrowing?’ at www.fsb.org.uk

The survey is based on 1,710 responses from the March 2011 FSB ‘Voice of Small Business’ Survey Panel of FSB members which took place between 7 and 18 March 2011.


ISDN is available for broadcast interviews

Contacts

Andrew Cave, Chief Spokesperson: 07917 628991
Prue Watson: 020 7592 8121 / 07825 125 695 prue.watson@fsb.org.uk
Sara Lee: 020 7592 8113/ 07595 067068 sara.lee@fsb.org.uk

For regional FSB contacts please go to www.fsb.org.uk/regions

 

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